Problems Problem 1-1. Problem 1-2. Problem 1-3. As of December 31, Charles Company had $12,000 in cash, held $95,000 of invento- ry, and owned other items that originally cost $13,000: Charles Company also had bor- rowed $40,000 from First City Bank. Prepare a balance sheet for Charles Company as of December 31. Be sure to label each item and each column with appropriate terms. Selected balance sheet items are shown for the Microtech Company. Compute the missing amounts for each of the four years. What basic accounting equation did you apply in mak- ing your calculations? Year 1 Year 2 Year 3 Year 4 Current assets $113,624 $2 $85,124 $ 7 Noncurrent assets 2 198,014 162,011 Total assets 3524600 5? 2 Current liabilities $56,142 $40,220 $ ? Ten i 2 ? 60,100 30,222 Paid-in capital 214,155 173,295 170,000 ‘170,000 Retained earnings 13,785 _(3,644) 1,452 2,350 Total liabilities and owners’ equity $524,600 $288,456 $ ? $220,111 Selected income statement items are shown for Astrotech Company. Compute the missing amounts for each of the four years. What basic accounting equation did you apply in mak- ing your calculations?22 Accounting: Text and Cases (Hint: To estimate the Year 4 missing numbers, compute the typical percentage each expense item is of sales for Years 1 to 3 and apply the percentage figure for each expense item to Year 4’s sales.) Year 1 Year 3 Year 4 Sales $12,011 511,545 $10,000 Cost of goods sold 3,011 2 Gross margin 2 ? Other expenses 6,201 2 Profit before taxes 2,799 ? 2,363 ? Tax expense 1,019 945 2 Net income $1,679 $1,528 $1,418 2 Problem 1-4. An analysis of the transactions made by Acme Consulting for the month of July is shown below. Cash + Accounts + Supplies + Equipment = Accounts + Owners’ Description of Receivable Inventory Payable Equity Transaction 1. +$20,000 +520,000 Investment 2.-$ 5,000 +87,000 +52,000 ‘ 3.-$ 1,000 +81,000 4.-$ 4,500 -$ 4,500 Salaries $.485,000 _+$5,000 +810,000 Revenues 6.-$ 1,500 -$1,500 7.4+51,000 $1,000 8-3 750 -5 750 Rent 9.-$ 500 -$ 500 Utilities 10. +$ 200 -$ 200 Travel nn. =8_200 =$ 200 Required: a, Explain each transaction, b. List the changes in the company’s balance sheet during the month of July. , Prepare an income statement for the month (ignore taxes). 4. Explain the changes in the Cash account. ©. Explain why the change in the Cash account and the month’s income are not the same. Problem 1-5. During the month of June, Bon Voyage Travel recorded the following transactions: Owners invested $25,000 in cash to start the business. They received common stock. The month’s rent of $500 was prepaid in cash. Equipment costing $8,000 was bought on credit $500 was paid for office supplies. . Advertising costing $750 was paid for with cash, Paid $3,000 employee salaries in cash, Eamed travel commissions of $10,000 of which $2,000 was received in cash. Paid $5,000 of the $8,000 owed to the equipment supplier. PANN Aw NErr le Chapter 1 The Nature and Purpose of Accounting 23 9. Used $100 of the office supplies. 10. Charged $1,000 of miscellaneous expenses on the corporate credit card. Required: a. Prepare an analysis of the month’s transactions using the same tabular format as shown in Problem 1-4 (ignore taxes). b. Explain how the transactions during the month changed the basic accounting equa- tion (Assets = Liabili s + Owners’ equity) for the company. ¢. Prepare an income statement for the month. d. Explain the changes in the Cash account. e. Explain why the change in the Cash account and the month’s income are not the same. Case 1-1 Ribbons an’ Bows, Inc. In January 2010, Carmen Diaz, a recent arrival from, Cuba, decided to open a small ribbon shop in the Coconut Grove section of Miami, Florida. During the month, she put together a simple business plan, which .she took to several relatives whom she believed would, be interested in helping her finance the new venture. ‘Two of her cousins agreed to loan the business $10,000 for one year at a 6 percent interest rate. For her part, Carmen agreed to invest $1,000 in the equity of the business. On March 1, 2010, with the help of an uncle who practiced law, Carmen formally incorporated her busi- ness, which she named “Ribbons an’ Bows.” Normally, the uncle would have charged a fee of $600 for handling the legal aspects of a simple incorporation, but, since Carmen was family, he waived the fee. ‘As soon as the new business was incorporated, Car- ‘men opened a bank account and deposited the cousins’ $10,000 loan and her $1,000 equity contribution. The same day, she signed an agreement to rent store space for $600 per month, paid on the last day of the month. ‘The agreement was for an 18-month period beginning April 1. The agreement called for a prepayment of the last two months’ rent, which Carmen paid out of the company bank account at the signing. Over the next few weeks, Carmen was actively en- gaged in getting ready to open the store for business on April 1. Fortunately for Carmen, the previous tenant had left counters and display furniture that Carmen could use at no cost to her. In addition, the landlord agreed to repaint the store at no cost, using colors of Carmen's choice. For her part, Carmen ordered, received, and paid for the store’s opening inventory of ribbons and ribbon accessories; acquired for free a simple cash register with credit-card processing capabilities from the local credit-card charge process- ing company after paying a refundable deposit; signed service agreements with the local phone and util- ity companies; ordered, received, and paid for some store supplies; and placed and paid for advertising announcing the store opening in the April 2 edition of the local paper. In addition, she bought and paid for a used desktop computer with basic business software already installed to keep track of her business transac- tions and correspondence. ‘On March 31, before opening for business the next day, Carmen reviewed the activity in the company’s cash bank account. Following the deposit of the loans and equity contribution, the following payments were made, 1. Last two months’ rent $1,200 2. Opening merchandise inventory $3,300 3. Cash register deposit $ 250 4. Store supplies $ 100 5. April 2 edition advertising $ 150 6. Used computer purchase $2,000 After reviewing her cash transaction records, Car- men prepared a list of Ribbons an’Bows assets and sources of its capital (see Exhibit 1).24 Accounting: Text and Cases EXHIBIT 1 Carmen’s March 31, 2010, Ribbons an’ Bows Assets and Capital Sources List Se ee Assets Sources of Capital ee nal Cash $4,000 Inventory 3,300 Supplies 100 Prepaid rent 1,200 Prepaid advertising 150 Computer/ Cousin’s software 2,000 loan $10,000 Cash register Carmen's deposit 250 equity —_1,000 $11,000 311,000 en Carmen eventually decided to expand her business by selling custom-designed ribbon table arrangements for weddings and other special events. This decision led to the purchase of a used commercial sewing ma- chine for $1,800 cash on May 1. Later, at a family Fourth of July celebration, one of Carmen’s cousins reminded her that she had promised to send the cousins a financial report covering the four- month period from March 1 to June 30. The next day, Carmen reviewed ‘the following Ribbons an’ Bows information she had gathered over, the last four months. 1. Customers had paid $7,400 cash for ribbons and accessories, but she was still owed $320 for ribbon arrangements for a large wedding delivered to the customer on June 30. 2. A part-time employee had been paid $1,510 but was. still owed $90 for work performed during the last week of June. 3. Rent for the three-month period had been paid in cash at the end of each month, as stipulated in the rental agreement. 4. Inventory replenishments costing $2,900 had been delivered and paid for by June 30. Carmen estimat- ed the June 30 merchandise inventory on hand had cost $4,100, 5. The small opening office supplies inventory was nearly all gone. She estimated supplies costing $20 had not been used, Carmen believed that the initial three months of business had been profitable, but she was puzzled by the fact that the cash in the company’s June 30 bank account was $3,390, which was less than the April 1 balance of $4,000. Carmen also was concemed about how she should reflect the following in her financial report: 1. No interest had been paid on the cousins’ loan, 2. The expenditures made for the desktop computer and its related software and the commercial sewing machine, She believed these expenditures would be beneficial to the business long after June 30. At the time she purchased the commercial sewing machine, Carmen estimated that it would be used for about five years from its May 1 purchase date, when it would then have to be replaced. Similarly, on March 31, she had estimated the desktop com. puter and its software would have to be replaced in two years’ time. Carmen believed the sewing machine and the computer along with its software would have no resale value at the end of their use- ful lives. 3. The free legal work performed by her uncle and the free cash register provided by the local credit-card charge processor. 4. Carmen had not paid herself a salary or dividends during the four months of operations. If cash was available, she anticipated that sometime in July she would pay herself some compensation for the four months spent working in the business. Before start- ing her business, Carmen had worked for $1,300 a month as a cashier in a local grocery store. Questions i 8 eee tl ah ae 1. How would you report on the three-month opera- tions of Ribbons an’ Bows, Inc., through June 30? ‘Was the company profitable? (Ignore income tax- es.) Why did its cash in the bank decline during the three-month operating period? 2. How would you report the financial condition of the business on June 30, 2010? . Do you believe Carmen’s first three months of op- eration could be characterized as “successful”? Explain your answer.Chapter 1 The Nature and Purpose of Accounting 25 Case 1-2 Kim Fuller* In the early fall of 2010, Kim Fuller was employed as a district sales engineer for a large chemical firm. During a routine discussion with plant chemists, Fuller learned ‘that the company had developed a use for the recycled material, in pulverized form, made from plastic soft drink bottles. Because the state had mandatory deposits onall beverage bottles, Fuller realized that a ready sup- ply of this material was available. All that was needed was an organization to tap that bottle supply, grind the bottles, and deliver the pulverized plastic to the chem- ical company. It was an opportunity Fuller had long awaited—a chance to start a business. In November 2010, Fuller began checking into the costs involved in setting up a plastic bottle grinding business. A used truck and three trailers were acquired to pick up the empty bottles. Fuller purchased one used grinding machine but had to buy a second one new; supplies and parts necessary to run and maintain the machines also were purchased. Fuller also purchased a personal computer with the intention of using it to keep company records. These items used $65,000 of the $75,000 Fuller had saved and invested in the company. A warehouse costing $162,000 was found in an ex- cellent location for the business. Fuller was able to in- terest family members enough in this project that three of them—two sisters and a brother— invested $30,000 each. These funds gave Fuller the $50,000 down pay- ment on the warehouse. The bank approved a mort- gage for the balance on the building. In granting the mortgage, however, the bank official suggested that Fuller start from the beginning with proper accounting records. He said these records would help not only with future bank dealings but also with tax returns and gen- eral management of the company. He suggested Fuller find a good accountant to provide assistance from the start, to get things going on the right foot. Fuller’s neighbor, Marion Zimmer, was an accountant with a local firm. When they sat down to talk about the new business, Fuller explained, “I know little about keeping proper records.” Zimmer suggested Fuller should buy an “off-the-shelf” accounting system software package from a local office supply retailer. * © Professor Robert N. Anthony. Zimmer promised to help Fuller select and install the package as well as lear how to use it, In order to select the right package for Fuller’s needs, Zimmer asked Fuller to list all of the items purchased for the business, all of the debts incurred, and the information Fuller would need to manage the business. Zimmer explained, that not all of this information would be captured by the accounting records and displayed in financial statements. Based on what Fuller told Zimmer, Zimmer promised to create files to accommodate accounting, and nonaccounting information that Fuller could access through the company’s personal computer. As Fuller’s first lesson in accounting, Zimmer gave Fuller a brief lecture on the nature of the balance sheet and income statement and suggested Fuller draw up an opening, balance sheet for the company. Confident now that the venture was starting on sol- id ground, Kim Fuller opened the warchouse, signed contracts with two local bottling companies, and hired ‘two grinding machine workers and a truck driver. By February 2011 the new firm was making regular deliv- cries to Fuller’s former employer. Questions 1. What information will Fuller need to manage the business? Classify this information in two catego- ries: accounting information and nonaccounting,in- formation. 2. See what you can do to draw up a beginning-of- business list of the assets and liabilities of Fuller’s company making any assumptions you consider useful. How should Fuller go about putting a value on the company’s assets? Using your values, what is the company’s opening owners’ equity? 3. Now that Fuller has started to make sales, what in- formation is needed to determine “profit and loss? ‘What should be the general construction of a profit and loss analysis for Fuller’s business? How fre- quently should Fuller do such an analysis 4. What other kinds of changes in assets, liabilities, and owners’ claims will need careful recording and re- porting if Fuller is to keep in control of the business?26 Accounting: Text and Cases Case 1-3 Baron Coburg* Once upon a time many, many years ago, there lived a feudal landlord in a small province of Western Europe. The landlord, Baron Coburg, lived in a castle high on a hill. He was responsible for the well-being of many peasants who occupied the lands surrounding his castle, Each spring, as the snow began to melt, the Baron Would decide how to provide for all his peasants during the coming year. One spring, the Baron was thinking about the wheat crop of the coming growing season. “I believe that 30 acres of my land, being worth five bushels of wheat per acre, will produce enough wheat for next, winter,” he mused, “but who should do the farming? Ibelieve T'll give Ivan and Frederick the responsi- bility of growing the wheat.” Whereupon Ivan and Frederick were summoned for an audience with Baron Coburg. “Ivan, you will farm on the 20-acre plot of ground and Frederick will farm the 10-acre plot,” the Baron began. “I will give Ivan 20 bushels of wheat for seed and 20 pounds of fertilizer. (Twenty pounds of fertil- izer are worth two bushels of wheat.) Frederick get 10 bushels of wheat for seed and 10 pounds of fertilizer. I will give each of you an ox to pull a plow, but you will have to make arrangements with Feyador the Plowmaker for a plow. The oxen, incidentally, are only three years old and have never been used for farming, so they should have a good 10 years of farm- ing ahead of them. Take good care of them because an ox is worth 40 bushels of wheat, Come back next, fall and return the oxen and the plows along with your harvest.” “Source: Academic Note “Another Implorable Occurrence,” W. T. Andrews, ACCOUNTING HORIZONS, Vol. 9:No.3, April 1974, pp. 369-370. © American Accounting Association. Ivan and Frederick genuflected and withdrew from the Great Hall, taking with them the things provided by the Baron. ‘The summer came and went, and after the harvest Ivan and Frederick returned to the Great Hall to account to their master for the things given them in the spring, Ivan said, “My Lord, I present you with a slightly used x, a plow, broken beyond repair, and 223 bushels of Wheat. I, unfortunately, owe Feyador the Plowmaker three bushels of wheat for the plow I got from him last spring. And, as you might expect, I used all the fertil- izer and seed you gave me last spring. You will also remember, my Lord, that you took 20 bushels of my harvest for your own personal use.” Frederick spoke next. “Here, my Lord, is a partially used ox, the plow, for which I gave Feyador the Plow- maker 3 bushels of wheat from my harvest, and 105 bushels of wheat. I, too, used all my seed and fertiliz- er last spring. Also, my Lord, you took 30 bushels of wheat several days ago for your own table. I believe the plow is good for two more seasons.” “You did well,” said the Baron. Blessed with this benediction, the two peasants departed, After they had taken their leave, the Baron began to contemplate what had happened. “Yes,” he thought, “they did well, but I wonder which one did better?” Questions 1. For each farm, prepare balance sheets as of the beginning and end of the growing season and an income statement for the season, (Do not be con- cemed that you do not have much understanding of what a balance sheet and income statement are; just use your intuition as best you can.) 2. Which peasant was the better farmer